Writing about proposals being considered by the SEC’s
Division of Investment Management (See
SEC to Consider Post-Canary Scandal Trading
Reforms
), ABA Executive Vice President Edward Yingling applauded
the SEC’s intent to protect investors of mutual funds.
However, the ABA expressed concern that the broad fixes
punish many – notably 401(k) plan participants – for the
actions of a few. Those fixes could
include imposing a firm 4PM deadline for all mutual
fund trades and a 2% redemption fee on the sale of shares
made within five days of purchase.

“We are concerned … that the regulatory solutions
suggested to date to combat late trading and market timing
ignore the operational complexities and other problems
associated with these proposed changes, particularly as
they impact the retirement savings of millions of 401(k)
plan participants,” Yingling penned in the letter to the
Director of the SEC’s Division of Investment Management
Paul Royce.
“We believe there are alternative solutions that can
satisfy the need to curb late trading, while, at the same
time, minimize problems associated with some of these
suggested solutions.”

Referencing the proposal being floated to curb mutual
fund late trading activity by imposing a “hard” 4
PM Eastern Time zone deadline for all mutual fund
trades to be reported to fund companies(See
Mutual Fund Proposal No “Treat” for
Retirement Plans
), Yingling’s letter said such a move would do significant
damage to the current architecture of 401(k) plans.

The ABA – an advocate group representing the American
banking community – said, “While this proposal may cure
illegal late trading, we believe it does far more than
address the problem at hand” since the proposal
discriminates against “the vast majority of mutual fund
investors who use intermediaries, including the millions
currently saving for retirement through their company’s
401(k) or individual retirement accounts.”
Overall, Yingling’s letter puts a total of $2.11 trillion
currently invested in defined contribution plans, the vast
majority of which are in 401(k) plans.

In fact, Yingling said imposing such a deadline would
create two “investor classes” – those that invest directly
with the mutual fund company and those investing via an
intermediary.
“Investors who invest directly with the mutual fund will
get the benefit of today’s [Net Asset Value] NAV, while
investors who invest through intermediaries will get the
next-day’s NAV, at best,” the letters outlines in its
attempt to discourage the creation of a system
discrimination “against investors solely upon their choice
of distribution channel.”

And as Yingling points out, such optimism is really only
limited to a “simple redeem or purchase order,” with even
more complexity involved if the participant would like to
transfer monies from one fund to another.

As an alternative, the ABA suggests that rather than a
4PM hard close for trades to be placed with the fund
company, that the intermediary be required to prove that
all trade requests were recorded before 4PM.
“This would allow all investors to be treated equally,”
Yingling says, plus, “the operational capability to achieve
this is either currently in place, or can be put in place
to include an electronic time stamp on all trade requests.
Such an electronic time stamp could be incorporated into a
system in such a way to ensure that it cannot be
manipulated.”

Redemption Fee

Similarly, Yingling’s letter expresses concern for the
impact of another of the SEC’s regulatory proposals –
requiring all funds except money markets to impose a
2%-redemption fee on the sale of shares made within five
days of purchase.
“We are concerned that [the 2%-redemption fee
proposal] will create a huge burden for recordkeepers, and
would require wholesale redesign of recordkeeping systems.”

Specifically, the ABA’s letter lays out difficulties
such a proposal would have on the application of “omnibus
accounts,” a system by which most retirement plans are
handled.
The difficulty would lie with tracking the participants
that engaged in market timing and then attempting the levy
the 2% redemption charge back to the specific plan within
those omnibus accounts, Yingling says in the letter.
Thus, the ABA urges the SEC to “carefully consider all the
potential consequences of possible solutions through a
proposed rulemaking.”

In fact, careful consideration was the overarching
theme of the letter, and reiterated in Yingling’s
conclusion, in which he encourages the SEC “to move
deliberately, recognizing the complex operational changes
that these proposals would necessitate, and the negative
impact on 401(k) plan participants and other investors
who choose to use intermediaries.”